Enron Inquiry Turns to Sales By Lay's Wife

By KURT EICHENWALD

Published: November 17, 2004

Federal prosecutors are investigating whether the wife of Enron's former chairman, Kenneth L. Lay, engaged in insider trading in a sale of company stock shortly before it collapsed into bankruptcy, people involved in the case said yesterday.

The sale by Mr. Lay's wife, Linda, involved 500,000 shares of Enron stock and was done through a family foundation, according to records and people involved in the case. The proceeds, totaling $1.2 million, did not go to the Lays, but were distributed to charitable organizations, which had already received pledges of contributions from the foundation.

Already, several Enron officers, including Mr. Lay; Jeffrey K. Skilling, a former chief executive; and Richard L. Causey, the former chief accounting officer, have been indicted on fraud charges. Other executives including Andrew S. Fastow, the former chief financial officer, have pleaded guilty to crimes and are serving as government witnesses.

By focusing on the transaction involving Mrs. Lay, the government could be trying to turn up the pressure on her husband in hopes of securing a guilty plea. Prosecutors used such tactics against Mr. Fastow, by starting an investigation into a comparatively minor tax violation committed by his wife, Lea.

People involved in the case said that Mr. Fastow was offered the opportunity to prevent his wife from being charged by pleading guilty; at the time he refused. Mr. Fastow did not reverse himself until his wife was indicted; she also pleaded guilty and is serving a prison term.

Andrew Weissmann, head of the Justice Department's Enron Task Force, declined to comment yesterday. A lawyer for the Lays, Michael Ramsey, confirmed the investigation, and criticized it as trying to criminalize innocent behavior to bring pressure against Mr. Lay.

''This is the last gasp of a dying prosecution,'' Mr. Ramsey said. ''This is an attempt at extortion. If I tried something like this, I would be indicted.''

He said that the sale was based on information in the market and that the proceeds went to charity. Neither Ken nor Linda Lay sold any personal shares that morning, he said.

The investigation of Mrs. Lay is focusing on Nov. 28, 2001, the day investors realized that Enron was probably heading for bankruptcy.

That morning, Mrs. Lay placed an order for the foundation to sell its Enron shares sometime between 10 and 10:20, people involved in the case said. For days up until that morning, Enron had been negotiating a possible merger with a rival, Dynegy, and details of the talks had been leaking out in media reports.

The evening before, people involved said, Chuck Watson, then chairman and chief executive of Dynegy, told Mr. Lay and others at Enron that he had doubts about the merger. While Mr. Watson agreed to consult with his board and his merger team before reaching a decision, the prospects for a deal were dim.

Records show that Mr. Lay returned home that night and was in the office early the next morning. The government is investigating whether he told his wife about the falling prospects for the merger before she placed the sell order.

Before the market opened that morning, there were already rumors of problems with the deal. The news emerged at about 10:30 a.m., when Standards & Poor's announced that it was cutting its credit rating for Enron. That put Enron on the hook for making good on some $3.9 billion in debt in a matter of months.

The market reacted swiftly, knocking Enron shares down by more than $1.50 a share. Shortly after the market became aware of the downgrade, Enron shares were selling at $2.60 to $2.70, according to a transcript of a CNNfn market news broadcast that morning. Brokerage records from First Union Securities, where the foundation maintained its account, show that the shares were sold at $2.38, for proceeds of about $1.2 million. Enron shares closed at about 60 cents that day.

While the timeline of events is difficult for Mrs. Lay, the case presents numerous hurdles for the government. The largest of those is that the Lays did not profit from the sale; while their charitable group, the Linda and Ken Lay Family Foundation, did not have the assets to meet its pledges, the obligation for those commitments would remain with the foundation, not the family. Records show that, in the months after the sale, the proceeds were given away.

The second difficulty is evidentiary. If Mr. Lay did inform his wife of the imploding merger, such communication is protected as a marital confidence and its disclosure cannot be compelled. That means that the government must find a third-party witness who heard from Mr. or Mrs. Lay about any discussion to prove that she had insider knowledge at the time of the trade.